China's Grave Challenges Based on a Widely Unbalanced Economy - The Hard Landing has Begun!

The Financial Repression Authority is joined by Richard Duncan, an esteemed
author, economist, consultant and speaker. FRA Co-founder, Gordon T. Long discusses
with Mr. Duncan about the current Chinese situation and the ramifications being
imposed on the global economy.

Richard Duncan is the author of three books on the global economic crisis.
The Dollar Crisis: Causes, Consequences, Cures (John Wiley & Sons, 2003,
updated 2005), predicted the current global economic disaster with extraordinary
accuracy. It was an international bestseller. His second book was The Corruption
of Capitalism: A strategy to rebalance the global economy and restore sustainable
growth. It was published by CLSA Books in December 2009. His latest book is
The New Depression: The Breakdown Of The Paper Money Economy (John Wiley & Sons,
2012).

Since beginning his career as an equities analyst in Hong Kong in 1986, Richard
has served as global head of investment strategy at ABN AMRO Asset Management
in London, worked as a financial sector specialist for the World Bank in Washington
D.C., and headed equity research departments for James Capel Securities and
Salomon Brothers in Bangkok. He also worked as a consultant for the IMF in
Thailand during the Asia Crisis. He is now chief economist at Blackhorse Asset
Management in Singapore.

Richard has appeared frequently on CNBC, CNN, BBC and Bloomberg Television,
as well as on BBC World Service Radio. He has published articles in The Financial
Times, The Far East Economic Review, FinanceAsia and CFO Asia. He is also a
well-known speaker whose audiences have included The World Economic Forum's
East Asia Economic Summit in Singapore, The EuroFinance Conference in Copenhagen,
The Chief Financial Officers' Roundtable in Shanghai, and The World Knowledge
Forum in Seoul.

Richard studied literature and economics at Vanderbilt University (1983) and
international finance at Babson College (1986); and, between the two, spent
a year travelling around the world as a backpacker.

The Chinese Financial Crisis

"China's economy resembles a spinning top that is running out of momentum.
It is wobbling and gyrating erratically."

China is really just running into a brick wall. If they continue to have more
and more credit growth, it will only exaggerate their problem. This is essentially
the nature of China's current problem. A stock market crash, diminishing returns
on credit, a plunge in imports, capital flight and currency volatility are
all signs that China's great economic boom is now coming to an end. In all
probability, this is just the beginning of what is likely to be a very protracted
economic slump.

China's economy need not collapse into a Chinese Great Depression to produce
a global economic crisis, although the possibility of economic collapse in
China cannot be ruled out. The 17% contraction in Chinese imports last year
was already enough to tip the global economy into recession. The consequences
of this economic hard landing in China will be felt in ever corner of the world.

Consequences of Increasing Credit in America

Despite the efforts of quantitative easing, it did not help or facilitate
much benefit to China. This is largely due to the fact that China's economy
is so large. There is a large gap between how much China produces and how much
China consumes. From 2005 to 2014, China invested $4.6 trillion more than it
consumed. If we look at aggregate financing it reveals a much more detailed
story of the credit growth situation in China. Since 2009 credit growth has
been significantly slowing, and once this began, so too did nominal GDP growth
begin to decline.

"China is increasingly misallocating and wasting credit."

During the last 25 years in China:

If credit growth in China continues to grow then by 2021, total credit growth
in China will be more than the peak credit growth the US had back in 2008.

The Gross Output Value of Construction increased by 134 times, growing
at an average annual rate of 21%.

Building Area Under Construction increased by 33 times, at an average annual
rate of 15%.

Steel Production increased by 12 times, at an average rate of 11% growth
per year. Consequently, China now has 50% of global steel capacity.

Cement Production increased 12-fold, growing by an average annual rate
of 11%. During just three years (2011 to 2013), China produced more cement
than the United States did during the entire 20th Century. China now has
59% of global cement capacity.

On the other hand many would believe that if China devalued the yuan, it would
bring in more capital investment, but this is not the case. If they had one
big devaluation it would make china much more competitive in the global economy.
The trade surplus will soar and bring in more money into china. But at the
same time China's trading partners would not be pleased because China already
has a large trade surplus with the rest of the world. So too devalue further
only to make the already large trade surplus even larger would be unfair by
anyone's standards.

Falling Forex Reserves

"Rather than the reserves shrinking, the more important thing to note
is that they have not been growing."

The buyers who are absorbing the treasuries being sold at are really people
just fleeing negative interest rates. Rather than take a negative yield, they
would rather buy US treasuries at a pathetic 1.7% on a 10yr. The reason China's
forex reserves are falling is because Chinese people want to sell Chinese yuan
and buy dollars. And with these dollars they want to buy treasury bonds.

I do expect there to be a steady depreciation in the yuan coming in the near
future. But much of this depends on what happens to the dollar. It is very
clear that if the dollar goes up, the yuan is going to go down and this is
a problem because the more the yuan goes down then the cheaper the Chinese
goods will become compared to the US. Therefore making it more difficult for
the fed to reach its mandate of 2% inflation.

Job Creation and Sustainment in China

The green shows that China's' economy made up 13% of the global economy. But
Chinese household consumption made up only 9% of global consumption, while
investment made up 24.4% of global investment. This is mind boggling because
its telling of investment in all kinds of structures which create jobs.

"If global investment and Chinese investment grow at the same rate as
they are now, then within 10 years; Chinese investment will make up 60%
of global investment. Of course this is not possible, it just won't happen,
so the investment is going to have to slow."

What Chinese authorities are telling is that they are consequently going to
move from investment driven growth into consumption driven growth, but this
again is just not possible because if you begin laying off factory workers,
then these people will consume less, not more. If investment slows as it must,
then consumption will also slow. So in order to have any growth at all, Chinese
spending will need to sharply increase.

"For the rest of the world it does not matter how much China's economy
is growing by, but that matter is how much their imports are growing by."

When Chinese imports are growing, china then becomes a significant driver
for global economic growth. But last year Chinese imports contracted by a staggering
17%. Brazil is now suffering the world depression in 100 years because commodity
prices have crashed due to lack of Chinese demand. The effects of this import
contraction are clearly being felt and it will be global. All around the world
we are seeing a rapidly growing backlash against free trade and the rise of
anti-free trade candidates on both the right and the left.

"We need to push up wages in the manufacturing industries around the
world. Currently the average wage rate globally is $8/day, and there are
hundreds of millions of people who would be happy to work for $5/day. We
now live in a global economy, we are very much interconnected and we have
to find a way to increase wages in the manufacturing sector."

Gordon T. Long has been publically offering his financial and economic writing
since 2010, following a career internationally in technology, senior management & investment
finance. He brings a unique perspective to macroeconomic analysis because
of his broad background, which is not typically found or available to the
public.

Mr. Long was a senior group executive with IBM and Motorola for over 20 years.
Earlier in his career he was involved in Sales, Marketing & Service of
computing and network communications solutions across an extensive array of
industries. He subsequently held senior positions, which included: VP & General
Manager, Four Phase (Canada); Vice President Operations, Motorola (MISL -
Canada); Vice President Engineering & Officer, Motorola (Codex - USA).

After a career with Fortune 500 corporations, he became a senior officer of
Cambex, a highly successful high tech start-up and public company (Nasdaq:
CBEX), where he spearheaded global expansion as Executive VP & General
Manager.

In 1995, he founded the LCM Groupe in Paris, France to specialize in the rapidly
emerging Internet Venture Capital and Private Equity industry. A focus in
the technology research field of Chaos Theory and Mandelbrot Generators lead
in the early 2000's to the development of advanced Technical Analysis and
Market Analytics platforms. The LCM Groupe is a recognized source for the
most advanced technical analysis techniques employed in market trading pattern
recognition.

Mr. Long presently resides in Boston, Massachusetts, continuing the expansion
of the LCM Groupe's International Private Equity opportunities in addition
to their core financial market trading platforms expertise. GordonTLong.com
is a wholly owned operating unit of the LCM Groupe.

Gordon T. Long is a graduate Engineer, University of Waterloo (Canada) in
Thermodynamics-Fluid Mechanics (Aerodynamics). On graduation from an intensive
5 year specialized Co-operative Engineering program he pursued graduate business
studies at the prestigious Ivy Business School, University of Western Ontario
(Canada) on a Northern & Central Gas Corporation Scholarship. He was subsequently
selected to attend advanced one year training with the IBM Corporation in
New York prior to starting his career with IBM.

Gordon T Long is not a registered advisor and does not give investment advice.
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